The Art of InvestingDecember 4, 2018
Investment is a skill to put your money into a race. The race that makes your money grow. We, everybody, know about savings! Banks, Post Office, and Insurances are the main core source where we invest as like savings or by buying policies. But there are other sources available too in the field such as stock market where we can buy shares of a reputed company (listed in NSE and BSE) and become a part of it (ownership) and can sell immediately when see our profit. By this, you can earn voting rights in a company and also become applicable to earn dividends from the company. To invest in a company we should first know about the company and its key skills to outperform in the future.
Fundamental Analysis is the key to choose the best participant among 5500 (approx.) companies in India. FA is nothing but a company’s monetary status comparative to its peer. Before going to any company we have to first understand the company’s asset and liability part. Because it is the only thing from where a company generates revenue or loss it’s capital. For that, you can log into moneycontrol.com or economictimes.com or directly to nseindia.com/bseindia.com (for reliable results).
The Balance Sheet
The balance sheet is a source to know the in-depth details of a company’s current status. As named Balance sheet, everything is been balanced over here. It comprises of Asset and Liability. Liability is the source of money and Assets are the use of money. Assets are calculated as (Equity + Liabilities). Let’s say if a company has taken a loan from a bank and have purchased a vehicle for the use of the company. Now here, the loan became Liability and the vehicle become the Asset.
1. Share Holder’s Fund: The fund that has been raised by the owner of the company. The shareholder’s money has invested in the company, the preferred equity capital.
i. Equity Share Capital (ESC): It’s the fund that a company raises from its shareholders. Every company has a Face value for accounting purpose. A company raises funds by issuing shares to the public multiplying with the face value. For example, if a company “X” has a face value of 5 and they have issued 10 crore shares to the public, then there ESC will be 50 crores (5 x 10 crore). It also means that the company has sold its 10 crore shares at 5 rupees.
2. Reserve and Surplus: It’s consist of two things, Share premium and the profit of the company after paying its dividends to the shareholders. Share premium is the amount that the company raises from its shareholders in the time of issuing shares at a price higher than the face value. For example, the company “X” has a face value of 5 and with a 2 rupee premium, it has sold its 10 crore shares at a price of 70 crores. The share premium is used for a future crisis like buyback of shares, bonus shares (to the existing shareholder), to write off expenses etc.
Now from the row “Total Shareholder Funds” we can see that from the past 4 years people are showing interest in this company and hence the company also increased its liability towards its shareholder. Which is a good sign for investing?
3. Non-Current Liabilities: It’s the liability that the company can hold for more than 1 year. In this segment the other terms are
i. Long-Term Borrowing: The loan or debt the company has taken from Bank or Private finance for more than one year.
ii. Deferred Tax Liabilities: If the company has defaulted its previous or current Tax, and have to pay in future time.
iii. Other Long-term Liabilities: This one is the company’s deposits for their operational cost like a Security deposit, Rent deposit, deferred credit etc.
iv. Long Term Provisions: A company knows its future expenses and liabilities like for product warranty and gratuity. To sustain that expenses a company always reserve some funds.
4. Current Liabilities: It’s the liability that the company uses for less than 1 year. In this segment the other terms are
i. Trade Payable: It is the amount that the company has to pay to the bill generated but the payment is on credit. Like raw materials etc.
ii. Other Current Liabilities: Those liabilities that have not mentioned in the current liabilities like unpaid dividends, the current maturity of long-term borrowings, bank overdraft etc.
iii. Short-Term Provision: The long-term provisions that have to clear in near term
From the Assets side-
1. Non-Current Assets: This segment shows those company’s assets that cannot be converted in cash up to 1 year or more.
i. Tangible Assets: These are the company’s building, factory, vehicles, and machinery etc. costs.
ii. Intangible Assets: Computer software, Management software, Patents, Goodwill etc. comes in this category.
iii. Capital work-in Progress: These are the assets under construction like an office building, producing a product etc. for which the company has already spent money. Which later or sooner became Tangible and Intangible Assets.
iv. Other assets: Those assets which are in transit like a vehicle for the company which is yet to deliver and etc.
v. Fixed assets: It comprises of Tangible and Intangible assets, Capital work-in-process which is non-convertible in cash.
vi. Non-current Investments: The investments that the company has made on Bonds, Equity, and Mutual Funds etc.
vii. Long Term Loans and Advances: If the company has provided loans to its employees, to another or group companies and advance payments for acquisition of any assets for more than one year.
viii. Other non-current assets: Assets like interest from FD, loans. Prepaid Expenses (Those for which payment is cleared but the receivable assets will be delivered in future like Insurance) and other assets that haven’t mentioned in the upper terms.
2. Current Assets: This segment shows those company’s assets that can be converted into cash within 1 year.
i. Short-term Investments: Investment in bonds, equity, Mutual Funds that will mature in the year.
ii. Inventories: It is consist of three category A. Raw Material B. Work in progress and C. Finished Goods. Hope the names reveals everything.
Iii. Trade Receivables: Sometimes a company sells its product to the Vendors on credit. But if a vendor defaults its payment to the company it becomes Bed Debt. Every company knows its vendor’s past record so that they always calculate the Estimated Bed Debt. Now from this Trade Receivable is the sum of Credit sell – Estimated Bed Debt.
iv. Cash and Cash Equivalents: The cash in hand with the company, the matured bonds, equity, and treasury bills etc.
v. Short term loans and advances: If the company has provided loans to its employees, to another or group companies and advance payments for acquisition any assets for less than one year.
vi. Other Current Assets: Those that haven’t mentioned in the upper terms like land acquisition, another campus for official use and etc.
From the above data, we can assume a company’s running business module. But from an investment perspective, we can not rely on a single data of a company. We have to look for other data also. And most importantly we have to compare each company with its peer company in the same industry.